Preliminary Results

RNS Number : 2167O

ScS Group PLC

01 October 2019

 

For Immediate Release	1 October 2019

ScS Group plc

("ScS" or the "Group")

Preliminary Results for the 52 weeks ended 27 July 2019

Continued profitable growth and increasing resilience

ScS, one of the UK's largest retailers of upholstered furniture and floorings, is pleased to announce its Preliminary Results for the 52 weeks ended 27 July 2019.

Financial highlights:

·      Gross sales improved £5.8m to £333.3m (2018: £327.5m)

·      Revenue improved £4.6m to £317.4m (2018: £312.8m)

·      Gross margin maintained at 45.0% (2018: 45.0%)

·      Underlying EBITDA from continuing operations improved by £0.6m to £19.7m (2018: £19.1m)

·      Underlying operating profit from continuing operations increased 4.6% to £14.3m (2018: £13.7m)

·      Operating profit from continuing operations of £13.9m (2018: £13.7m)

·      Underlying earnings per share of 30.3p (2018: 26.8p), an increase of 13.1%

·      Statutory earnings per share of 28.5p (2018: 26.8p)

·      Free cash flows in the year of £16.0m

·      Strong balance sheet with cash of £57.7m (2018: £48.2m) and no debt

·      Recommended final dividend of 11.20p per share, full year dividend of 16.70p per share (2018: 16.20p), an increase of 3.1%

Operational highlights:

·      Strong like-for-like order growth of 4.2% during the year

·      Continued investment in our e-commerce offering has driven an online sales increase of 21.7% to £16.8m (2018: £13.8m)

·      Roll out of our new in-store sales app completed end of July 2019 improving the customer experience

·      5 star "Excellent" rating maintained on Trustpilot with over 160,000 reviews

·      Completed refurbishments of our flooring departments in every store

·      New store opened Kirkcaldy (Scotland) in September 2019

·      Implementation of technology for delivery, surveying and upholstery teams, further enhancing our customer experience

Current trading:

·      Whilst it is still very early in the new financial year, the Group has had a more challenging start to FY20, with like-for-like order intake falling 7.6% for the period from 28 July 2019 to 29 September 2019. On a two year basis, like-for-like order intake was down 3.0%. The period has been impacted by the record temperatures seen over the key August bank holiday weekend and the increased political and economic uncertainty that the UK is currently facing.

David Knight, Chief Executive Officer of ScS, commented:

"I am delighted to report another year of good progress and growth for ScS in our continued effort to ensure we remain Britain's best value sofa and carpet retailer.

The Group saw a £5.8m (1.8%) increase in gross sales in the year to £333.3m (2018: £327.5m). The increase was impacted by a lower opening order book at the start of the year, due to the warm weather and the football World Cup at the end of the previous financial year. Sales were also impacted by the closure of two stores, which did not meet the required level of return for the capital employed.

Gross profit increased to £149.9m (2018: £147.2m), with the gross margin percentage being maintained at 45.0% (2018: 45.0%). Underlying EBITDA increased 3.0% to £19.7m (2018: £19.1m) and underlying profit before tax rose 7.1% to £14.6m (2018: £13.6m).

Since the start of the current financial year, trading conditions have been more challenging, with like-for-like order intake falling 7.6% for the period from 28 July 2019 to 29 September 2019. This period was impacted by the record temperatures experienced by the UK across the August bank holiday weekend and the increasing political and economic uncertainty we are currently facing in the UK.

We remain conscious of the impending Brexit deadline, and the impact this may have on the market, consumer confidence and the wider economy. However, the Group's financial health has never been as strong and with our resilient, debt-free balance sheet, we are in a good position to manage the ongoing uncertainty, and furthermore seek opportunities which will add value in the longer term.

Our strong and clear value offering has proven successful, and we are confident it will continue to appeal to our customers who want to buy great products at the lowest possible price."

Enquiries:

ScS Group PLC David Knight, Chief Executive Officer Chris Muir, Chief Financial Officer	c/o Buchanan [phone]
Buchanan Richard Oldworth Tilly Abraham Charlotte Slater	Tel: [phone] [e-mail]

Investor and Analyst Meeting

A meeting for analysts will be held at the office of Buchanan, 107 Cheapside, London, EC2V 6DN on 1 October 2019 commencing at 9.30am. ScS Group plc's Preliminary Results 2019 are available at www.scsplc.co.uk.

An audio webcast will be available on:

https://webcasting.buchanan.uk.com/broadcast/5d808dd81e79456d8fcc55d9

Notes to Editors

ScS is one of the UK's largest retailers of upholstered furniture and floorings, promoting itself as the "Sofa Carpet Specialist", seeking to offer value and choice through a wide range of upholstered furniture and flooring products. The Group's product range is designed to appeal to a broad customer base with a mid-market priced offering and is currently traded from 100 stores.

The Group's upholstered furniture business specialises primarily in fabric and leather sofas and chairs. ScS sells a range of branded products which are not sold under registered trade marks and a range of branded products which are sold under registered trade marks owned by ScS (such as Endurance, Inspire and SiSi Italia). The Group also offers a range of third party brands (which include La-Z-Boy, G Plan and Celebrity). The Company's flooring business includes carpets, as well as laminate and vinyl flooring.

CHAIRMAN'S STATEMENT

I am once again pleased to report a strong year for ScS, as we continue to demonstrate our ability to deliver profitable and sustainable growth despite a challenging economic backdrop. This culminated in the Group delivering a set of results slightly ahead of market expectations.

Alongside our robust trading performance, I am proud of the excellent progress we have made in the first full year of our refreshed strategy, as we continue to invest in our people and the business to ensure we are able to maximise opportunities for growth.

Overview

This year has been exciting, interesting, and demanding. Our refreshed strategy has given our people new impetus and drive, engaging the business with renewed focus on how we maintain the progress and success we have enjoyed over the previous four years. Central to this is promoting a culture of challenge and change across everything we do. Revenue and profits have benefitted, and we continue to generate strong cash flows which have further strengthened our balance sheet, enhanced the resilience of the Group and allowed us to explore potential investment opportunities. Sales order growth has been strong, with like-for-like order intake growth of 4.2% in the year. In particular, our online and core in-store furniture offerings have performed strongly.

I am particularly proud of delivering improved financial results alongside an increasingly positive customer experience, and maintaining our 5-star 'Excellent' rating with over 160,000 Trustpilot reviews. This is testament to our focus on ensuring that the customer is central to everything we do.

Review of the year

The first half of the year was strategically significant for the Group following the decision to end our House of Fraser concession business, exiting our final store in January. Given the challenges being faced by House of Fraser, the Board quickly concluded that this operation was no longer economically viable for the Group.

This speed of decision was an important one for the business, and the first such challenge of this size we had been confronted with in recent years. As our results show, the venture did not generate the sales levels required to ensure the partnership was worthwhile and therefore exiting the House of Fraser concession has had minimal impact on our profitability. My only regret is that we could not retain all our dedicated and hardworking colleagues who had built this partnership. I would again like to take this opportunity to thank all of those colleagues who worked in our House of Fraser concessions.

The Group's resilient balance sheet ensures we are in a strong position to manage potentially challenging economic headwinds, but it also enables the Group to invest internally and consider external opportunities as they arise. Internally we have made significant strides in adopting new technology, which is increasing efficiencies and improving our customers' shopping experience.

As previously reported, the Group considered acquiring sofa.com, which would have added a complementary brand, a new customer demographic and access to a manufacturing base, which we would have looked to utilise in our existing ScS business model. As with any investment, following due diligence, the Board set a value at which the acquisition would be earnings accretive. We were not successful in this instance, however, an investment like this is something we will continue to consider.

The second half of the year allowed increased management focus on our key ScS business, increasing momentum and maximising the opportunities in the market, including gaining market share.

We have benefitted as a Group from having a store estate that we have managed cautiously and sensibly, opening stores where opportunities exist and exiting stores where we do not make the right level of return. We review our store network regularly and have identified a small list of key sites where we would be keen to open if the right space and location could be secured. We maintain the financial flexibility to be able to quickly take these opportunities if and when they become available. Our latest store in Kirkcaldy, which opened in September 2019, is an excellent example of a location that we believe fits well into our portfolio. I am delighted to welcome our new Kirkcaldy team to ScS and look forward to seeing what they achieve.

Our people

Each year I attend our triannual sales conferences, and I very much enjoy meeting many of the dedicated, hardworking employees who contribute to the great team of people we have at ScS. As we continue to change and adapt in the challenging retail environment, our colleagues are vital if we are to continue to move the business forward. I am consistently proud of the improving culture and their fantastic achievements and I would like to thank them all for their hard work and commitment. Despite the significant technological investments we have made, and will continue to make, our business is reliant on our people, and they will continue to be at the heart of what we do.

Ensuring the Board maintains a full and fair view of the thoughts and feelings of our teams, I am very pleased that George Adams, one of our Non-Executive Directors, has been able to spend a significant amount of time out in the business this year, meeting many of our colleagues and hearing what they have to say about their working lives first-hand. He reports his findings regularly to the Board, and our discussions have benefitted from the insight he has been able to share.

The Board

Although we have continued to benefit from stability on the Board since our IPO in 2015, we have also taken the opportunity to further strengthen our leadership team through the appointment of Angela Luger as a Non-Executive Director in May 2019. Angela brings significant retail, technological and business experience from her previous roles and I am delighted to welcome her to the Group.

Dividend

Our progressive dividend policy aims to ensure we target improving returns to shareholders, with earnings cover in the range of 1.25x to 2.00x and cash cover in the range of 1.75x to 2.25x. With this in mind, the Board is proposing a final dividend of 11.20p.  If approved, this would give a full-year dividend of 16.70p, an increase of 3.1% on the full-year dividend for 2018.

Summary and outlook

We have a clear vision to be Britain's best value sofa and carpet retailer and a clear strategy to support it. Against the background of political and economic uncertainty and low consumer confidence, our value offering ensures that we make it easy for customers to continue to buy with the confidence that they are getting the best deal.

Despite the uncertainty of recent years, the Group has continued to grow and is a stronger and more resilient business than ever. Trading has been more difficult since the start of our new financial year, however we have built a resilient business that is well positioned to take advantage of opportunities as they arise and I am very positive about the future prospects for the business.

Alan Smith

Chairman

CHIEF EXECUTIVE'S REPORT

Overview

I am delighted to report another year of good progress and growth for ScS in our continued effort to ensure we are Britain's best value sofa and carpet retailer. The economic environment continues to provide us with challenges, uncertainty and opportunities. The Group continues to focus on providing great value furniture and flooring products at pricing to suit a range of budgets. The year saw the Group working closely with our suppliers to maintain this range of key price points, whilst investing in our people to ensure a best-in-class customer experience.

Customer shopping habits continue to change, including the increasing propensity to research and buy online. The Group has reviewed and improved its omnichannel offering. Despite the uncertain economic and political headwinds, focusing on delivering our strategy has meant we have consistently achieved profitable growth for the last four years. Our purpose remains to provide an excellent customer experience with outstanding value, quality and choice.

Results

The Group saw a £5.8m (1.8%) increase in gross sales in the year to £333.3m (2018: £327.5m). The increase was impacted by a lower opening order book at the start of the year, due to the warm weather and the football World Cup at the end of the previous financial year. Sales were also impacted by the closure of two stores, which did not meet the required level of return for the capital employed. In-store furniture sales increased £3.3m (+1.2%), online sales increased £3.0m (+21.7%) and in-store flooring sales decreased £0.5m (-1.2%).

Gross profit increased to £149.9m (2018: £147.2m), with the gross margin percentage being maintained at 45.0% (2018: 45.0%). Underlying EBITDA increased 3.0% to £19.7m (2018: £19.1m) and underlying profit before tax rose 7.1% to £14.6m (2018: £13.6m).

Strategic priorities

This financial year saw the Group complete the first year of our refreshed three year strategy. The Group remains focused on those same seven key strategic priorities:

·      Building and inspiring an outstanding team;

·      Delivering an exceptional customer experience;

·      Optimising our product strategy;

·      Driving sales densities within our ScS network;

·      Creating a market-leading website and digital awareness; 

·      Accelerating our flooring growth, and

·      Improving our profitability.

Building and inspiring an outstanding team

Our number one priority is ensuring we have the best team in the sector and making ScS a great place to work. This priority underpins the other six priorities, and it is of paramount importance that we continue to attract, recruit and retain the right people.

The start of the year saw the Group strengthen its senior management team and also saw the business re-organise and reduce the layers of management, bringing the Board closer to our colleagues and customers. We have added a new 'mobile-first' recruitment website, and made excellent strides in implementing our culture survey actions. In the second half of the year, I was also pleased to use our new improved staff communications publication to deliver a pay increase and additional holiday for all colleagues, together with our new ScS benefits platform. We've got much more to do in this area, but have made great progress to date.

Delivering an exceptional customer experience

This year we've made excellent progress in improving our customer journey. 'nYwhere', our new tablet based in-store sales app piloted and launched nationwide. It was a significant investment and I'm very pleased with the impact it's already having, and the potential it still offers. nYwhere allows the display of the full range of products, colours, features, and standardises the sale process to guide customers and the sales team through the benefits of additional items and enhancements.

The customer experience has been further enhanced by the implementation of new technology into other areas of the business. Our delivery teams now use a sign-on-glass delivery system, our flooring surveyors are now utilising the latest mobile measuring technology and our service technicians are operating with a route and job optimisation solution that ensures our customers are being looked after faster and better than ever before.

The feedback we receive is key to measuring our success. In last year's Annual Report, I was excited to announce hitting our 100,000 Trustpilot review milestone in June 2018, five years after bringing Trustpilot into our business as a key measure of customer satisfaction. A year later, we now have in excess of 160,000 reviews. I am delighted so many of our customers take the time to give us feedback, and proud that we continue to maintain our 5-star 'Excellent' Trustpilot rating.

Optimising our product strategy

I'm very pleased with the work we have done this year with our suppliers to ensure we offer the best value, quality and choice. Our products look and feel better than ever, and we have continued to work with our suppliers to ensure our products continue to perform at the high level our customers expect. We have also continued to work together to find solutions to improve the customer experience, such as developing a re-usable 'quilted bag' with one of our largest suppliers, to help reduce product damage and lower our plastic usage and environmental impact. By capturing and sharing feedback with our suppliers, we continue to see improvements in our product quality and performance metrics. We also introduced enhanced reporting in relation to supplier 'on-time deliveries', which has driven positive change during the year, helping our distribution centres plan their stock movements, and improving the final customer delivery experience.

The Group has just introduced two new brands into our stores, one being Inspire (an ScS brand), which celebrates great British workmanship and quality, and a new third-party brand Celebrity, which is one of the UK's leading manufacturers of rising and reclining chairs and sofas.

Driving sales densities in our ScS network

Our in-store gross sales grew £2.8m to £316.5m (2018: £313.7m), representing 95.0% (2018: 95.8%) of the Group's total sales, and reiterating how important our store network is to the business, especially given the 'big-ticket' nature of the majority of our offering and the customers' desire to sit on and feel the product they are buying. Gross furniture sales in stores increased 1.2% to £274.2m (2018: £270.9m), although our gross flooring sales decreased by 1.2% to £42.3m (2018: £42.8m) as the flooring market continued to shrink.

Our furniture sales growth was organically driven, with no new store openings during the year. It was also impacted by the closure of one of our Edinburgh stores at the end of the previous financial year and our Reading store in the current year. We continue to pursue a number of new locations across the UK, where we feel there are opportunities for expansion with the right level of return on investment, and were pleased to recently open our new Kirkcaldy store in September 2019.

Our organic sales growth was helped by the strategic changes we made during the year, including simplifying our management structure to take our senior managers closer to what is happening on the shop floor, and adjusting our product mix to continue to focus on the value end of the market and target a lower, more promotional price point. As a consequence of our pricing adjustment, average furniture order values fell 3.5% to £1,527 (2018: £1,582). The strategy proved successful, increasing sales whilst maintaining gross margin.  As a consequence of the above our sales density per square foot increased 2.2% to £229 (2018: £224).

Since the year end, we have been working on finalising a model store, which will define the look and feel of the ScS stores of the future. The plan is that this concept will be rolled out across the UK in the next few months, making ScS the "Home of Big Brand Sofas and Flooring".

Creating a market-leading website and digital awareness

Gross sales growth of 21.7% to £16.8m marks another standout year for our online sales channel. Despite the 'big ticket' nature of our product offering, which means our customers have tended to prefer to purchase after trying our product in store, the modern consumer is more willing than ever to buy online. Our online offering ensures we give our customers the shop window they need to feel confident in the product they're buying. We have continued to improve our site with new features and tools, and are aware that enhancing the visualisation of the product will improve online conversion. This year we opened our new in-house photography and CGI studio to provide more dynamic imagery and video content. We have greatly increased our use of social media to show our products in real homes, put our in-store sales staff's expertise online through new video content, and delivered our first major social influencer campaign, reaching over a million followers.

Following our commitment to fully re-platforming our website,  we have begun to research and scope exactly what we want to deliver, ensuring our new site is built from the ground up to be faster, more responsive, and better suited to what our customers want. We know we can also improve our online flooring offer and have improved our carpet sample process. We can support and drive traffic to our stores even better than we already are, which tools such as Google Store Sales Direct are helping us to achieve. We are excited by the opportunities for growth in this area.

Accelerating our flooring growth

In a year where we've made good progress in many of our strategic priorities, succeeding with our flooring strategy has been one of our toughest challenges. After continual growth since we expanded into the flooring sector, 2019 proved challenging, with HMRC reporting a 3.2% reduction in the volume of housing transactions, a key driver for flooring sales, and increasingly aggressive competition, particularly between the two largest market specialists. Our flooring sales in-store decreased 1.2% to £42.3m.

I believe our strategy remains key to ensure we are positioned to take advantage of the future growth expected in the UK floorings market. We have invested in flooring department re-fits across our stores, standardising our display, improving our point of sale and optimising range plans, product placement and promotions. Our surveying and fitting processes have been greatly enhanced through new technology and training, and we pro-actively work with our suppliers to widen our range choice and increase competitive tension. We continue to increase customer awareness and we are increasing our flooring-specific training for our retail store colleagues to aid product knowledge and conversion. Our flooring average order value increased to £686 (2018: £679).

I am also delighted to report that we have recently agreed to be the first national retailer to sell a new product made from recycled marine plastic and fishing nets, reclaimed from the world's oceans, introducing a unique and sustainable carpet to our product offering.

Improving our profitability

We have once again increased our gross profit and EBITDA, with higher gross sales improving gross profit by 1.8%, and underlying EBITDA from continuing operations improving by 3.0% to £19.7m. Despite our conscious effort in the year to achieve a lower promotional price point, and increases in the base rate which drives our cost of interest free credit, we successfully held gross profit margin at 45.0%. This was aided by the enhanced gross margin reporting by store, brand and product, which provides our retail management with greater insight into areas for potential improvement coupled with improving terms with our suppliers.

As well as underlying gross profit increases, we have made improvements in driving operational efficiencies, and increased EBITDA margin to 5.9% (2018: 5.8%). We go into more detail on this in the Financial Review, however the success of our improved procurement process, and our lease re-gear programme have helped to partially offset  the inflationary pressures we have seen on wage costs.

Current trading and outlook

Since the start of the current financial year, trading conditions have been more challenging, with like-for-like order intake falling 7.6% for the period from 28 July 2019 to 29 September 2019. This period was impacted by the record temperatures experienced by the UK across the August bank holiday weekend and the increasing political and economic uncertainty we are currently facing in the UK.

We remain conscious of the impending Brexit deadline, and the impact this may have on the market, consumer confidence and the wider economy. However, the Group's financial health has never been as strong and with our resilient, debt-free balance sheet, we are in a good position to manage the ongoing uncertainty, and furthermore seek opportunities which will add value in the longer term.

Our strong and clear value offering has proven successful, and we are confident it will continue to appeal to our customers who want to buy great products at the lowest possible price.

David Knight

Chief Executive Officer

FINANCIAL REVIEW

	Year ended 27 July 2019	*Restated Year ended  28 July 2018
	£m	£m
Gross sales	333.3	327.5
Revenue	317.4	312.8
Gross profit	149.9	147.2
Distribution costs	(17.3)	(16.8)
Administration expenses before exceptionals	(118.3)	(116.7)
Total operating expenses	(135.6)	(133.5)
Underlying operating profit from continuing operations	14.3	13.7
Net finance income/(expense)	0.3	-
Exceptional items	(0.3)	-
Profit before tax from continuing operations	14.3	13.7
Tax	(2.9)	(2.7)
Profit after tax from continuing operations	11.4	11.0
Loss from discontinued operations	-	(0.3)
Profit after tax for the period	11.4	10.7
Underlying earnings per share	30.3p	26.8p
Underlying EBITDA from continuing operations	19.7	19.1

*Results above have been restated to show continuing operations, following the presentation of the House of Fraser concession business as discontinued.

Gross sales and revenue

Gross sales increased by £5.8m (1.8%) to £333.3m (2018: £327.5m) and is attributable to:

·      An increase in furniture sales in stores of 1.2% to £274.2m (2018: £270.9m);

·      A decrease in flooring sales in stores of 1.2% to £42.3m (2018: £42.8m), and

·      An increase in online sales of 21.7% to £16.8m (2018: £13.8m).

Revenue, which represents gross sales less charges relating to interest-free credit sales (see note 3 - Segment information), increased by 1.5% to £317.4m (2018: £312.8m). This was driven mainly by the increased sales order volume in the year, which was partly offset by a lower opening order book when compared to the prior year and the closure of two stores. Revenue growth was slightly below the growth in gross sales due to increases in the underlying rates driving the cost of interest-free credit provided by the Group's finance houses.

Gross profit

Gross margin (gross profit as a percentage of gross sales) was maintained at 45.0% (2018: 45.0%). The increased cost of offering interest-free credit (due to movements in LIBOR) was offset by improved stock management and supplier terms.

The higher volume year on year, resulted in an increase in gross profit of £2.6m (1.8%).

Distribution costs

Distribution costs comprise the total cost of the in-house distribution function and includes employment costs, the cost of leasing vehicles and related running costs and property costs (principally rent, rates and utilities) for the nine distribution centres, as well as costs of third-party delivery services contracted to support peak delivery periods.

Despite a reduction in the average order value, which increased the number of deliveries, distribution costs expressed as a percentage of gross sales for the year were in line with prior year at 5.2%.

Administrative expenses before exceptionals

Administrative expenses comprise:

·      Store operating costs, principally employment costs, property related costs (rent and rates, utilities, store repairs and depreciation);

·      Marketing expenditure, and

·      General administrative expenditure, which includes the employment costs for the directors, senior management and all head office-based support functions and other central costs.

Administration costs for the year totalled £118.3m, compared to £116.7m in the prior year. Administrative costs were 35.5% of gross sales, down from 35.6% in the prior year.

There was an overall increase in administrative costs of £1.6m, driven by payroll related costs, with the increase in marketing costs of £0.3m offset by other cost savings. The payroll related costs break down as follows:

·      £1.1m increase in basic pay due to additional employees to support our expanded e-commerce team and new in-house photography studio, together with pay reviews and national living wage increases;

·      £0.3m increase in performance related pay following the Group's improved EBITDA, and

·      £0.2m increase in the cost of pension contributions due to auto-enrolment.

Marketing costs increased to £22.4m in the year (2018: £22.1m), supporting the increased sales order growth, and remained at 6.7% of gross sales.

Flexible costs

The nature of the Group's business model, where almost all sales are made to order, results in the majority of costs being proportional to sales. This provides the Group with the ability to flex its cost base as revenue changes, protecting the business should there be wider economic pressures. As shown below, the proportion of cost variability remained consistent year-on-year.

Total costs before interest, tax, depreciation and amortisation across for the year were £313.6m (2018: £308.3m).

Of this total, 76% (2018: 76%), or £237.7m (2018: £233.5m) are variable or discretionary, and are made up of:

·      £183.4m cost of goods sold, including finance and warranty costs (2018: £180.2m);

·      £17.3m distribution costs (2018: £16.9m);

·      £22.4m marketing costs (2018: £22.1m), and

·      £14.6m performance related payroll costs (2018: £14.3m).

Semi-variable costs totalled £39.7m, or 13% of total costs, for the year (2018: £38.4m; 12%) and are predominantly other non-performance related payroll costs and store costs. Rent, rates, heating, and lighting make up the remaining £36.2m (11%) of total costs (2018: £36.5m; 12%).

The Group continues to ensure a low average remaining lease tenure on our store portfolio by ensuring low tenures on existing lease renewals and on new stores. This provides the Group with increased flexibility to exit or relocate stores where required. The majority of recent leases entered into are 10 years in length.

Underlying operating profit 

The operating profit before exceptional costs was £14.3m for the year, compared to an operating profit of £13.7m for the same period last year, driven by the increased gross profit, partially offset by the increased distribution and administrative expenses.

Underlying EBITDA from continuing operations

An analysis of underlying EBITDA is as follows:

	Year ended 27 July 2019	Restated Year ended  28 July 2018
	£m	£m
Underlying operating profit from continuing operations	14.3	13.7
Depreciation and amortisation	5.4	5.4
Underlying EBITDA from continuing operations	19.7	19.1
Exceptional costs	(0.3)	-
EBITDA from continuing operations	19.4	19.1

Exceptional costs

Exceptional costs relate to the aborted acquisition of sofa.com. As announced in January 2019, the Group was in discussions regarding a potential acquisition of the business and assets of Sofa.com Limited. Ultimately this transaction did not occur, and the professional fees relating to the due diligence conducted have been classified as exceptional for the purposes of providing relevant comparative information.

Discontinued operations

As announced on 25 October 2018, the Group ceased trading from its 27 concessions within House of Fraser at the end of January 2019, following House of Fraser's administration on 10 August 2018, and the subsequent purchase of its trade and assets by Sports Direct International plc.

As a consequence of ceasing to trade through the House of Fraser concession, the associated revenue and costs have been shown separately as a discontinued operation within our results, and prior year comparatives have been restated to show only the continuing ScS business. As the results in note 12 show, the operation made an underlying EBITDA profit of £0.5m, before exceptional items of £0.4m. The same period in the prior year resulted in an EBITDA loss of £0.3m. The prior year result was impacted by the Group reviewing the recoverability of monies owed from the House of Fraser business that went into administration and by a review of the carrying value of stock in House of Fraser in light of the trading issues it was facing at the time.

The underlying EBITDA generated in the current period was largely as a consequence of the success of the Group to retain and fulfil many of the orders in the pre-administration order book and the timing benefit of delivering orders without the associated advertising expense which would usually support future deliveries.

Taxation

The tax charge for the financial year is higher (2018: higher) than if the standard rate of corporation tax had been applied, mainly due to charges not deductible for tax purposes, principally the exceptional professional fees, share based payment charge and depreciation on capital expenditure that does not qualify for capital allowances.

Earnings per share (EPS)

Basic underlying EPS for the year ended 27 July 2019, which excludes exceptional costs, was 30.3p compared to 26.8p in the previous year, an increase of 13.1%.

Statutory basic EPS for the year ended 27 July 2019 was 28.5p compared to 26.8p in the previous year, an increase of 6.3%.

A full reconciliation of EPS is shown in note 8.

Cash and cash equivalents

Cash increased £9.5m in the year to £57.7m (2018: £48.2m). The strong cash flow has been generated from operations, reflecting the negative working capital business model whereby:

·      For cash/card sales, customers pay deposits at the point of order and settle outstanding balances before delivery;

·      For consumer credit sales, the loan provider pays ScS within two working days of delivery, and

·      The majority of product suppliers are paid at the end of the month following the month of delivery into the distribution centres.

A summary of the Group's cash flows is shown below:

		Year ended     27 July 2019	Year ended     28 July 2018
		£m	£m
Cash generated from operating activities		24.1	21.0
Net capital expenditure		(5.6)	(2.9)
Net taxation and interest payments		(2.5)	(2.9)
Free cash flow		16.0	15.2
Dividends		(6.5)	(6.0)
Purchase of own shares		-	(1.2)
Net cash generated		9.5	8.0

Net capital expenditure in the year includes:

·      £3.8m for building, maintenance and store capex (including £1.4m on branch improvements across our whole network, £0.7m on flooring department refits and £0.4m towards the new Kirkcaldy store), and

·      £1.8m on new technology (including our 'nYwhere' tablet based sales ordering app and new business reporting and support tools).

Dividend

The Board recognises the importance of a dividend to investors and has set a progressive policy, with the intention to:

·      Keep earnings cover in the range of 1.25x to 2.00x;

·      Ensure cash cover remains in the range of 1.75x to 2.25x through the economic cycle, and

·      Pay an interim dividend that will be approximately one third of the total dividend.

The Board considers this policy appropriate given the strength of the balance sheet, whilst ensuring the Group has sufficient resources to pursue potential future opportunities to deliver growth.

An interim dividend of 5.50p per ordinary share was paid in May 2019. The Group has continued to strengthen and deliver positive results, with very strong cash generation and a balance sheet that is growing in resilience.  Additionally, the Group continues to maintain a £12.0m committed revolving credit facility.

Therefore, despite the continued uncertain economic environment, the Board is confident in the outlook for the Group and proposes a full-year dividend of 16.70p, a 3.1% increase on the full-year dividend for 2018. If approved, this would result in a final dividend of 11.20p. The dividend, if approved, will be paid on 25 November 2019 to shareholders on the register on 1 November 2019. The ex-dividend date is 31 October 2019.

The total dividend paid is in line with target earnings per share cover, and cash cover through the economic cycle.

Principal risks and uncertainties

Save as set out below, the principal risks and uncertainties which the group faces are unchanged from those detailed on pages 30 to 33 of the Annual Report for 2018, which is dated 1 October and is available from the ScS Group plc website.

The Board considers that the overall economic environment risk has increased. The UK is seeing a reduction in consumer confidence, largely driven by the political uncertainty, including the UK's withdrawal from the EU. To the extent possible, the Group has sought to mitigate the supply chain risk by working closely with suppliers to ensure contingency plans are in place. Notwithstanding this, the Group could face reduced demand leading to lower sales, exchange rate fluctuations leading to increased costs and border delays affecting lead times.

The Board also considers the risk of increased regulation of the sale of warranties to have increased in the year. The FCA is proposing to enforce statistical reporting of this type of insurance product, and also the risk that the product may become regulated by future legislation. Mitigating actions are being considered and the Board remains focused on monitoring developments in this area.

ScS Group plc

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	Note	Unaudited 52 weeks ended 27 July 2019	Restated Audited 52 weeks ended 28 July 2018
		£'000	£'000
Gross Sales	3	333,267	327,465
Revenue	3	317,406	312,828
Cost of sales		(167,547)	(165,590)
Gross profit		149,859	147,238
Distribution costs		(17,310)	(16,879)
Administrative expenses		(118,610)	(116,691)
Operating profit		13,939	13,668
Analysed as:
Underlying operating profit		14,291	13,668
Exceptional items included within administrative expenses	4	(352)	-
Operating profit		13,939	13,668
Finance costs	5	(96)	(228)
Finance income	6	417	205
Net finance income/(costs)		321	(23)
Profit before taxation		14,260	13,645
Taxation	7	(2,880)	(2,622)
Profit from continuing operations		11,380	11,023
Loss from discontinued operations	12	(4)	(345)
Profit for the period		11,376	10,678
Attributable to:
Owners of the parent		11,376	10,678
Profit attributable and total comprehensive income for the period		11,376	10,678
Underlying earnings per share
Basic earnings per share (pence)	8	30.3p	26.8p
Diluted earnings per share (pence)	8	29.1p	26.0p
Statutory earnings per share:
Basic earnings per share (pence)	8	28.5p	26.8p
Diluted earnings per share (pence)	8	27.4p	26.0p

There are no other sources of comprehensive income.

The 2018 results above have been restated to show continuing operations, following the presentation of the House of Fraser concession business as discontinued (see note 12).

ScS Group plc

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Attributable to owners of the parent
		Share capital	Share premium	Capital redemption reserve	Merger reserve	Treasury reserve	Retained earnings	Total equity
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 July 2017		40	16	13	25,511	-	7,699	33,279
Total comprehensive income		-	-	-	-	-	10,678	10,678
Share-based payment expense		-	-	-	-	-	542	542
Treasury shares (note 11)		-	-	-	-	(268)	(897)	(1,165)
Dividend paid		-	-	-	-	-	(6,032)	(6,032)
Balance at 28 July 2018		40	16	13	25,511	(268)	11,990	37,302
Balance at 29 July 2018		40	16	13	25,511	(268)	11,990	37,302
Total comprehensive income		-	-	-	-	-	11,376	11,376
Share-based payment expense		-	-	-	-	-	765	765
Treasury shares (note 11)		-	-	-	-	177	(177)	-
Dividend paid		-	-	-	-	-	(6,547)	(6,547)
Balance at 27 July 2019		40	16	13	25,511	(91)	17,407	42,896

ScS Group plc

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Note	2019 £'000	2018 £'000
Non-current assets
Intangible assets		1,642	1,151
Property, plant and equipment		21,065	21,450
Total non-current assets		22,707	22,601
Current assets
Inventories		19,209	21,865
Trade and other receivables		8,754	8,536
Cash and cash equivalents		57,666	48,162
Total current assets		85,629	78,563
Total assets		108,336	101,164
Current liabilities
Current income tax liabilities		1,951	1,650
Trade and other payables	9	56,624	54,566
Total current liabilities		58,575	56,216
Non-current liabilities
Trade and other payables		6,413	7,001
Deferred tax liability		452	645
Total non-current liabilities		6,865	7,646
Total liabilities		65,440	63,862
Capital and reserves attributable to the owners of the parent
Share capital		40	40
Share premium		16	16
Capital redemption reserve		13	13
Treasury reserve		(91)	(268)
Merger reserve		25,511	25,511
Retained earnings		17,407	11,990
Equity attributable to the owners of the parent		42,896	37,302
Total equity		42,896	37,302
Total equity and liabilities		108,336	101,164

CONSOLIDATED STATEMENT OF CASH FLOWS

	2019 £'000	2018 £'000
Cash flows from operating activities
Profit before taxation	14,260	13,645
Adjustments for:
Loss from discontinued operations before tax (note 12)	(5)	(426)
Depreciation of property, plant and equipment	4,824	5,035
Amortisation of intangible assets	676	518
Share-based payments	765	542
Finance costs	96	228
Finance income	(417)	(205)
	20,199	19,337
Changes in working capital:
Decrease in inventories	2,656	219
(Increase)/decrease in trade and other receivables	(220)	1,163
Increase in trade and other payables	1,486	314
Cash generated from operating activities	24,121	21,033
Interest paid	(96)	(228)
Income taxes paid	(2,774)	(2,896)
Net cash flow generated from operating activities	21,251	17,909
Cash flows used in investing activities
Purchase of property, plant and equipment	(4,377)	(2,306)
Payments to acquire intangible assets	(1,240)	(575)
Interest received	417	205
Net cash flow used in investing activities	(5,200)	(2,676)
Cash flows used in financing activities
Dividends paid	(6,547)	(6,032)
Purchase of own shares (note 11)	-	(1,165)
Net cash flow used in financing activities	(6,547)	(7,197)
Net increase in cash and cash equivalents	9,504	8,036
Cash and cash equivalents at beginning of year	48,162	40,126
Cash and cash equivalents at end of year	57,666	48,162

Notes to the audited consolidated financial statements

1.             General information

ScS Group plc (the "Company") is a company limited by shares incorporated and domiciled in England, within the UK (Company registration number 03263435). The Company's principal activity is to act as a holding company for its subsidiaries. The Company and its subsidiaries' (the 'Group') principal activity is the provision of furniture and flooring, trading under the names ScS.

2.             Accounting Policies

Basis of preparation

The Board approved the preliminary announcement on 30 September 2019.

The results for the year ended 27 July 2019, including comparative financial information, have been prepared in accordance with EU endorsed International Financial Standards ("IFRS"), IFRIC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. ScS Group plc will publish full financial statements that comply with IFRS in October 2019.

The financial information does not constitute the Company's statutory accounts for the years ended 2018 or 2019, but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

The financial information presented in respect of the year ended 27 July 2019 has been prepared on a basis consistent with that presented in the annual report for the year ended 28 July 2018.

Going concern

The Group generates strong cash flows, reflecting the negative working capital requirements of the business model. In addition, the Group has a committed £12.0m revolving credit facility in place. The Group's forecasts and projections show that the Group has adequate resources to continue in operational existence for the foreseeable future.

Having considered the Group's current trading and cash flow generation including severe but plausible stress testing scenarios, the Directors have concluded that it is appropriate to prepare the Group Financial statements on a going concern basis.

New standards, amendments and interpretations

The Group has adopted IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' effective for the current financial year and to all years presented in these consolidated accounts. Comparative periods remain unchanged from previous years. The adoption of either standard has not had a significant impact on the Group's profit for the period or equity.

IFRS 16

IFRS 16 'Leases' will be effective for the year ending 25 July 2020 onwards and the impact on the financial statements will be significant. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a right-of-use asset for all lease contracts. Therefore, the Group's operating leases related to property and vehicles will be brought on to the balance sheet. The lease liability is calculated as the discounted value of remaining lease payments at the date of initial recognition (see below), and the Group expects to adopt the "modified retrospective" transition method whereby the initial right-of-use asset is recognised at a value equal to the lease liability at the date of transition.

Depreciation of the right of use asset will be recognised in the income statement on a straight-line basis, with interest recognised on the lease liability. This will result in a change to the profile of the net charge taken to the income statement over the life of the lease. Depreciation and interest charges will replace the lease costs currently charged to the income statement and consequently there will be a significant adjustment to Group EBITDA.

IFRS 16 has no economic impact on the Group, nor how the business is run or its cash flows. It is expected that banking covenants will be normalised to reflect a position consistent with historical accounting standards. The Group does not currently intend to alter its approach going forward as to whether assets should be leased or purchased.

Whilst depreciation will be recognised on a straight line basis, IFRS 16 requires interest to be calculated on the effective interest rate method. This results in a higher level of interest being charged during the early period of the lease, falling as the lease progresses and associated liability falls. When compared to rental costs, this will result in a reduction in the Group's profit during the early stage of a lease and an increase during its latter stages.

Impact of the new standard

The Group has prepared an estimate of the impact in the Group's accounts as at the current year end, but this may change until the Group presents its financial statements for the year ending 25 July 2020, as the Group's lease portfolio is frequently changing and the new accounting policies are subject to change. There will be no restatement of comparative information.

All leases entered into on or after 28 July 2019 will be recognised from the date of inception.

Using this approach, the Group will:

·      Apply IFRS 16 to leases previously identified in accordance with IAS 17 Leases and IFRIC 4 Determining Whether an Arrangement Contains a Lease.

·      Calculate the lease term according to management's appetite for exercising any available extension or break options.

·      Calculate a lease liability as at 28 July 2019 based on the remaining lease payments payable after that date.

·      Discount the remaining gross lease payments using the applicable interest rate, which will generally be the incremental borrowing rate, as at 28 July 2019 applicable to each relevant asset type and weighted average length of the lease term remaining on the commencement date.

·      Recognise right-of-use assets as at 28 July 2019 equal to the present value of the future lease payments, using the incremental borrowing rate as at that date.

·      Exclude any initial direct costs from the measurement of the right-of-use assets that are recognised on adoption of IFRS 16 as at 28 July 2019.

Using lease data as at 28 July 2019, the expected impact of adopting IFRS 16 as at that date, applying the same modified retrospective approach as described above, would result in the Group:

·      Recognising a right-of-use asset as at 28 July 2019 of c. £126m, net of impairment relating to onerous lease provisions, and any prepaid or accrued lease payments, and

·      Recognising a lease liability as at 28 July 2019 of c. £129m.

The impact on the Group's Consolidated Statement of Comprehensive Income for year ending 25 July 2020 will be to:

·      Increase underlying EBITDA by c. £25m (the expected rent charge);

·      Increase underlying operating profit by c. £2m (rent charge less depreciation);

·      Increase finance costs by c. £4m (the interest charge), and

·      Decrease profit before tax by c. £2m (the net of the depreciation and interest versus the rent charge).

We would cease to hold an onerous lease provisions (2019: £0.5m). The provisions will instead be used to impair the "right of use" asset, with a resultant reduction in deprecation over the depreciation period, resulting in a timing difference that as with interest, impact early and benefit later years. The depreciation impact was factored into the assessment outlined above.

The tax effects of the adoption of IFRS 16 are still being assessed, although current indications are that we expect there to be minimal impact on the effective tax rate.

Critical accounting judgements and estimates

The preparation of the financial statements under IFRS requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Relevant accounting judgement and estimates which relate to volume rebates, stock provisions and loss making stores and onerous leases will be disclosed in full in the 2019 annual financial statements.

3.             Segment information

The Directors have determined the operating segments based on the operating reports reviewed by the senior management team (the Executive Directors and the other Directors of the trading subsidiary, A. Share & Sons Limited) that are used to assess both performance and strategic decisions. The Directors have identified that the senior management team are the chief operating decision makers in accordance with the requirements of IFRS 8 'Segmental reporting'.

The Directors consider the Group operates one type of business generating gross sales and revenue from the retail of furniture and flooring. All gross sales and revenue, profit before taxation, assets and liabilities are attributable to the principal activity of the Group and other related services. All gross sales and revenues are generated in the United Kingdom.

An analysis of gross sales and revenue is as follows:

				Year ended 27 July 2019                 £'000	Restated Year ended 28 July 2018 £'000
Sale of goods				309,932	305,702
Associated sale of warranties				23,335	21,763
Gross sales				333,267	327,465
Less: costs of interest free credit				(15,861)	(14,637)
Revenue				317,406	312,828

4.             Exceptional items

In order to provide a clearer understanding of underlying profitability, underlying operating profit excludes exceptional items, which relate to costs that, either by their size or nature, require separate disclosure in order to give a fuller understanding of the Group's financial performance.

Exceptional costs disclosed within continuing operations relate to the aborted acquisition of sofa.com (£0.35m). As announced in January 2019, the Group was in discussions regarding a potential acquisition of the business and assets of Sofa.com Limited. Ultimately this transaction did not occur, and the professional fees relating to the due diligence conducted have therefore been deemed exceptional.

5.             Finance costs                       

		Year ended 27 July 2019                 £'000	Year ended 28 July 2018 £'000
Bank facility renewal fees		-	132
Bank facility non-utilisation fees		96	96
		96	228

6.             Finance income                               

		Year ended 27 July 2019                 £'000	Year ended 28 July 2018 £'000
Bank interest received		417	205

7.             Taxation

The total tax charge for the financial year of £2.9m (2018: £2.6m) comprises a corporation tax charge of £3.1m (2018: £2.5m) and a deferred tax credit of £0.2m (2018: charge £0.1m). The tax charge is an effective rate of 20.2%, which is higher (2018: 19.2% - higher) than if the standard rate of corporation tax had been applied, mainly due to charges not deductible for tax purposes, principally depreciation on capital expenditure that does not qualify for capital allowances, the exceptional professional fees and share based payment charge.

8.             Earnings per share

		Year ended 27 July 2019	Year ended 28 July 2018
		pence	pence
a) Basic earnings per share attributable to the ordinary equity holders of the company
From underlying continuing operations		29.4p	27.7p
From underlying discontinued operation		0.9p	(0.9p)
Total basic earnings per share from underlying operations		30.3p	26.8p
From exceptional costs		(1.8p)	-
Total basic earnings per share		28.5p	26.8p
b) Diluted earnings per share attributable to the ordinary equity holders of the company
From underlying continuing operations		28.3p	26.9p
From underlying discontinued operation		0.8p	(0.9p)
Total diluted earnings per share from underlying operations		29.1p	26.0p
From exceptional costs		(1.7p)	-
Total diluted earnings per share		27.4p	26.0p
c) Reconciliations of earnings used in calculating earnings per share
Profit from continuing operations		11,380	11,023
- Add back exceptional costs net of tax		352	-
Profit from underlying continuing operations		11,732	11,023
Loss from discontinued operation		(4)	(345)
- Add back exceptional costs net of tax		359	-
Profit from underlying discontinued operations		355	(345)
Total profits from underlying operations		12,087	10,678
Total profits from operations		11,376	10,678
d) Weighted average number of shares used as the denominator
Weighted average number of shares in issue for the purposes of basic earnings per share		39,934,853	39,804,480
Effect of dilutive potential Ordinary shares:
- share options		1,563,000	1,220,656
Weighted average number of Ordinary shares for the purpose of diluted earnings per share		41,497,853	41,025,136

9.             Trade and other payables                 

	Year ended 27 July 2019                 £'000	Year ended 28 July 2018 £'000
Trade payables	25,859	26,294
Payments received on account	14,697	12,232
Other taxation and social security payable	4,063	4,492
Accruals	12,005	11,548
	56,624	54,566

The fair value of financial liabilities approximates their carrying value due to short maturities. Financial liabilities are denominated in pounds sterling.

Payments received on account represent deposits taken from customers at the point of order and in advance of the Group fulfilling its performance obligations to provide goods and services for customer orders. They will be realised in the next 12 months.

10.          Dividends

A final dividend for year ended 28 July 2018 of 10.90p was paid on 26 November 2018. It has been recognised in shareholders' equity in the year ended 27 July 2019.

An interim dividend of 5.50p per ordinary share was declared by the Board of Directors on 19 March 2019 and paid on 9 May 2019. It has been recognised in shareholders' equity in the year ended 27 July 2019.

A final dividend for the year ended 27 July 2019 of 11.20p per ordinary share is proposed by the Board of Directors.

At 27 July 2019 the retained earnings of the Company amounted to £63.5m.

11.          Treasury reserve

As at 27 July 2019 the Group holds 42,718 of its own ordinary shares of 0.1 pence each in the Group at an average purchase price of 214.2 pence for the purposes of satisfying management share incentive awards.

During the previous year the Group's Employee Benefit Trust purchased 544,154 ordinary shares of 0.1 pence each in the Group at an average price of 214.2 pence per Ordinary Share for the purposes of satisfying management share incentive awards. As at 28 July 2018, 418,581 of these shares had been used to satisfy awards, with the remainder held as treasury shares.

12.          Discontinued operations

Following the closure of the final House of Fraser concession in January 2019, in accordance with IFRS accounting standards, the results of the House of Fraser concessions are now presented as discontinued operations.

The income statement relating to the discontinued operations is set out below:

Income statement of discontinued operations

	Year ended 27 July 2019	Year ended 28 July 2018
	£'000	£'000
Gross Sales	7,279	24,852
Revenue	7,193	24,485
Cost of sales	(3,956)	(14,385)
Gross profit	3,237	10,100
Distribution costs	(575)	(994)
Administrative expenses	(2,667)	(9,532)
Operating loss	(5)	(426)
Analysed as:
Operating profit/(loss) before exceptional items	438	(426)
Exceptional items*	(443)	-
Operating loss	(5)	(426)
Loss before taxation	(5)	(426)
Taxation	1	81
Loss from discontinued operations	(4)	(345)
Attributable to:
Owners of the parent	(4)	(345)
Loss attributable and total comprehensive loss for the period	(4)	(345)

Net cash inflow from operating activities	1,492	706
Net increase of cash generated from discontinued operation	1,492	706

Underlying EBITDA

An analysis of underlying EBITDA is as follows:

	Year ended 27 July 2019	Year ended 28 July 2018
	£'000	£'000
Operating profit/(loss) before exceptional items	438	(426)
Depreciation	86	81
Underlying EBITDA from discontinued operations	524	(345)
Exceptional items*	(443)	-
EBITDA from discontinued operations	81	(345)

*Exceptional items disclosed within discontinuing operations comprise amounts payable for loss of office and other costs incurred relating to the closure of the House of Fraser concessions.

 

END

 

 

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